US Dollar Set for Near-term Pullback, Sterling Offering Sell Entries
ASIA/EUROPE FOREX NEWS WRAP
The US Dollar had its worst day in two months yesterday, and thus far today, there’s been little reprieve for the world’s reserve currency. Or, to put the decline in context, the best performing major in 2013. There’s also been a lot of hype surrounding the British Pound, which had a marvelous day yesterday (which has also continued into today), now sitting some 300-pips off of its low established on Tuesday just above 1.4800.
Mainly, I find that these are technically-driven moves. That is to say, there hasn’t been a material shift in the fundamentals that would warrant a reconsideration of my biases (long USD, short GBP). Again, putting the GBPUSD rally in context: it is up approximately +2.15% this week, but remains about -7.50% off of its highs (before the rally, it was down nearly -9.50% in 2013). What do I mean by “technically-driven”? A quick glance at the weekly GBPUSD chart is very revealing: the pair was displaying its most extreme oversold RSI reading since the 4Q’08, just as the global financial crisis was heating up.
As the GBPUSD trades back towards favorable reentry points for short positions (between the 21-EMA and the 2010-2013 range lows, from 1.5160 to 1.5320), it’s important to consider two key points that suggest this is just a technically-driven rebound, and why the GBPUSD should fall once again soon:
- The US Treasury 2s10s spread is just off its widest point of the year, which means the interest rate environment is becoming more supportive of a stronger US Dollar; this suggests the US Dollar is being viewed as a “growth currency” as well as a “safe haven.”
- Although there is a marginal benefit to exporters, the weak British Pound debilitates already-weak British consumers thanks to boosted austerity measures and inflation running well-beyond the Bank of England’s target of +2.0%.
Taking a look at European credit, peripheral yields have eased slightly, offering support for a continuation of the Euro rally that began yesterday after the US cash equity open. The Italian 2-year note yield has decreased to 1.763% (-2.7-bps) while the Spanish 2-year note yield has decreased to 2.241% (-2.1-bps). Similarly, the Italian 10-year note yield has decreased to 4.604% (-3.2-bps) while the Spanish 10-year note yield has increased to 4.843% (+0.4-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:50 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.16% (-0.88% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change, though it’s noted that the Bullish Falling Wedge scenario seems to be taking shape after a failed run towards the key 1.2860/80 level, as first discussed yesterday: “While the Bullish Falling Wedge outcome remains possible, the breach of the yearly lows yesterday following better than expected US data has increased the likelihood of further losses before a rebound. Key support comes in at 1.2860/80, for three reasons: the 50.0% Fibonacci retracement on the July 24 low to the February 1 high; the 200-DMA; and the late-November and early-December swing lows. Failure in this area could lead to a ‘waterfall’ sell-off towards 1.2660. Resistance is at 1.3010/15 (8-EMA), 1.3080/100, and 1.3110/40 (March swing highs, 21-EMA). Support comes in at 1.2860/80 and 1.2660.”
USDJPY: I maintain: “The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher. Downside pressure has been prevalent again on Wednesday, though bulls continue to fight the downturn. Price has rebounded firmly above 96.00, and a test of the yearly high near 96.70 could be around the corner.”
GBPUSD: The past several days I’ve been suggesting that “there is potential for a GBPUSD reversal over the coming days, as exhibited by the Bullish Falling Wedge on the 4H chart, which could lead to a run up towards 1.5200 or 1.5300 on an overshoot. Reselling this area for new lows makes sense, it being major support over the past several years – the range dating back to August 2010, from 1.5300 to 1.6300.” This has indeed occurred, with new short positions now being eyed as price approaches the 21-EMA at 1.5162. Of note, the GBPUSD hasn’t touched the 21-EMA since February 11, and it hasn’t closed above the 21-EMA since January 11. Resistance comes in at 1.5162 and 1.5250/320. Support comes in at 1.5030/40 (8-EMA), and 1.4830/40.
AUDUSD:No change: “A break of 1.0340/80 points to 1.0460/80. An alternative bullish view of an Inverse Head & Shoulders may have formed on the 4H chart, adding further evidence for a run back towards the late-January swing highs. Deceivingly strong Australian employment data has provoked the pair to rip into 1.0380, where it has been rejected thus far today, although the mid-February swing highs were tested. Failure could lead to a pullback below 1.0300 before the next drive higher.” It is worth noting that a bullish 8-/21-EMA crossover is in place on the daily chart, so the March low at 1.0110 may have been set.
S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”
GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”
--- Written by Christopher Vecchio, Currency Analyst
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